Remember peak oil? Neither does anyone else.
Two decades ago oil executives worried about running out of the stuff, and as late as the early 2000s people were planning on $200 per barrel oil and $5.00 per gallon gasoline. Times have changed.
With fracking unlocking millions of barrels of oil per day and consumers, at least for a while, driving more efficient vehicles, oil supplies expanded while demand growth eased.
This is great news for consumers, but its hard on oil producers, particularly countries with nationalized oil firms that fill government coffers. OPEC and a larger group led by Russia, together called OPEC+, have put quotas on their output in efforts to lift oil prices. It has worked, at least in part, but now producers are running up against a new problem, the coronavirus.
The virus has killed at least 106 people, with more than 2,800 infected. Chinese authorities have effectively locked down Wuhan, a city of some 10 million people, and several other cities. The spread of the virus has pummeled the price of crude oil, and indeed other commodities, as the market fears it will lead to a slump in fuel demand as people cancel travel plans and economic activities are curtailed.
Oil recently closed at $59.32 per barrel, the lowest price in three months.
It’s obviously hard to quantify what the exact hit to demand will be, with much depending on how quickly the virus is contained.
If the experience with Severe Acute Respiratory Syndrome (SARS), another type of coronavirus that struck Asia in 2003, is any guide, there will be a short, sharp hit to fuel demand, particularly jet fuel, followed by a recovery.
That might give oil producers a little hope that all of this will be over soon, but there are no guarantees.
In an odd bright spot for the energy sector, several oil producers have gone offline temporarily.
Civil conflict in Libya has knocked almost 1 million bpd of output offline, with the North African country’s state oil firm saying it was down to 262,000 bpd from 1.2 million previously.
Nigeria’s exports are also under a bit of a cloud, with major producer Royal Dutch Shell declaring force majeure on shipments of the Bonny Light grade on Jan. 22 after a pipeline was shut.
Kazakhstan suspended oil shipments to China on Jan. 16 after the discovery of excess levels of organic chloride, although some crude has since started flowing from the central Asian nation.
The decline in supply can offset falling demand, supporting prices.